Practical construction remedies – retaining title to materials

18 March, 2010
by: Cripps

Under many standard form contracts, payment certificates are issued in respect of ‘work done and materials reasonably and properly brought to site’ and so work is paid for after the event, rather than in advance.  This addresses the age-old ‘chicken or egg?’ risk allocation between Contractor and Employer: i.e. ‘What comes first; payment by the Employer or delivery of materials by the Contractor?’  In such circumstances a Contractor would be well advised to learn how to use retention of title clauses to protect their position.

 

The default position

If a construction contract does not provide an ‘adequate payment mechanism’ to determine what payments become due and when, the relevant provisions of the Scheme for Construction Contracts are implied into the void. Under the Scheme, the Contractor bears the risk and is paid for materials manufactured on site or brought onto the site, at the end of each relevant payment period. 

Most standard form contracts provide that title (i.e. ownership) passes to the Employer when materials are included in a payment certificate issued to the Main Contractor, rather than upon delivery to site.  The risk of retention of title disputes is therefore compounded for sub-contractors, whose materials may have been included in a main contract payment certificate before the Main Contractor has paid the sub-contractor for them. 

Sub-contractors and suppliers beware: even if your title to materials has not passed to the Main Contractor, the Employer can still obtain a superior title to materials if (a) when delivering them, the Main Contractor had physical possession of the materials with the Subcontractor’s consent; (b) the Employer receives the materials in good faith and (c) the Employer is not aware of sub-contract retention of title provisions. As a quirk of law, more than one party can have title to the same materials; it is a question of ensuring your title claim takes priority over any other.

 

Retention of title clauses

A well drafted retention of title clause is an important weapon in the armoury of anyone supplying building materials.  It can reverse the natural order of things by retaining the supplier’s title to any unfixed materials. If the customer is a main contractor and has received a payment certificate from the Employer covering the value of the materials, then the retention of title clause should give an unpaid subcontractor’s title priority over the Employer’s, as long as the Employer is notified of the clause prior to delivery. 

 

Fixed materials

It is more difficult to retain title to materials that have been fixed to the site. Ownership of materials passes to the Employer (and/or to any landowner) as soon as materials are fixed, regardless of payment. Express agreement with the Employer or landowner is required to change the position.  A sub-contract retention of title clause will assist a contractor only if brought to the Employer and/or landowner’s attention before the materials became fixtures.

 

Part-fixed materials

What happens if the materials are part installed when the retention of title dispute arises?

To establish at what point the materials became fixtures, the relevant factors in applying the test are:

• the “fixer’s” intention, e.g. piling unbonded stones to form a dry stone wall constitutes fixing materials, whereas piling stones to store them does not;
• the degree of annexation, namely the extent to which the goods have become incorporated within or fixed to the permanent structure;
• to what extent the precise steps needed to install the materials in question have been carried out; and
• the steps required to remove the materials in a condition to be resold.

The overriding principle is whether the fixing of each item in question was intended to enable it to be more conveniently used and enjoyed (a) as an item in its own right or (b) to enable the land or building to be more conveniently used and enjoyed as a piece of real property. If ‘(a)’ applies, title may not have passed.  If ‘(b)’ applies, title has passed unless the parties previously agreed otherwise.

If title has passed, an unpaid contractor is in a no win situation. On the one hand, he is not entitled to remove the materials even if the Employer disconnects them. On the other, he may be required to honour any ongoing maintenance obligation, pursuant to which, – as if to rub salt in the wound – he is obliged to remove and replace defective materials.

 

Plant

Plant erected for the purposes of the works is treated differently. In the absence of agreement to the contrary, there is an arguable right to remove the plant upon completion (by analogy with a tenant’s trade fixtures in landlord and tenant law).  To avoid arguing this complicated point later, it would be wise to notify the relevant parties of an express provision in this regard.

Where the party in possession of materials ignores a contractor’s retention of title claim, the contractor can bring proceedings for wrongful interference with the materials.  The available remedies are (a) an order for their return or (b) damages for trespass to property and / or wrongful ‘conversion’ of the materials.

A party seeking an injunction to prevent further interference must act quickly: the Court will apply the ‘balance of convenience’ test to the application.

This means weighing up the inconvenience to both parties that (a) granting the injunction would cause against (b) refusing it.  Option (b) still leaves the wronged party with a separate claim for damages.  Establishing that damages would be an inadequate remedy, usually because of an urgent need for alterative remedy (e.g. return of the materials) is the key to success.  Unnecessary delay will undermine the credibility of applicant’s case.

 

Practical tips

To get your property back:

1. Include a robust retention of title clause in your contract for any building materials supplied and plant brought to site.
2. Give written notice of the clause to any party that may have a superior interest in the land to which your materials are delivered and (if different) to the land in which they will become incorporated.
3. Mark the packaging of your materials with a notice that your title has been retained (traditional milk bottles are an example of this working well).
4. If possible, arrange for any materials you still own to be stored separately. This may give you some protection from the insolvency of your customer or their client.
5. If your title claim is ignored, act quickly. The threat of an injunction to restrain a party from trespassing on or fixing to your materials to land should be taken more seriously if made promptly.

 

Reviewed in 2015